Steal a march on the indices rebalance

’Tis the season to get set ahead of the December quarter rebalance for the S&P/ASX indices.

We now take it as just about gospel that the best way to deal with index rebalancing is to get in ahead of the actual announcement. Analysts, and we typically highlight the work of Macquarie’s John Conomos, note that stocks being added tend to run up ahead of Standard & Poor’s announcement of the rebalance, which is 10 sessions before the actual change. Then, they underperform into the implementation.

For deletions, the general trend has been to underperform ahead of the announcement then trade flat until implementation. There’s also a tendency for a bit of a rebound following implementation.

The December quarter rebalance is going to be announced on December 6, and the changes are effective after close on December 20.

UBS had prepared its index predictions for the upcoming event and says that, in line with its research, it’s best to trade the index changes a month out from the rebalance date. Which is right about now.

Within the S&P/ASX 50, potential additions are
Ramsay Health Care
,
Tatts Group
and
James Hardie
, while potential deletions are
Qantas
and
Toll Holdings
. UBS’s prediction is Ramsay to displace Qantas.

JB Hi-Fi
,
Super Retail Group
,
REA Group
and
IOOF
are seen as potential additions to the S&P/ASX 100, while the potential deletions are
PanAust
,
Whitehaven Coal
,
UGL
and
OZ Minerals
. The broker thinks JB Hi-Fi and Super Retail are most likely to get in at the expense of PanAust and Whitehaven.

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Company Profile

Matthew Ross has decided to neutralise its cyclical exposure, cutting diversified financials to neutral (
Henderson Group
and
Macquarie Group
the preferred picks), and with
Suncorp
replacing
QBE Insurance
.

Cardno
is added, with
Sims Metal Management
dropped, as the preferred deep value play on a cyclical US recovery.

The portfolio is still overweight energy and diversified resources, but
Oil Search
has been removed to give greater focus to the lower-risk, quality names in those sectors (i.e.
BHP Billiton
,
Santos
).

Gaming is upgraded via
Crown
, while
CSL
now becomes the preferred pick in healthcare at the expense of
Ansell
(which was seen as more cyclically dependent, and that’s not what Goldies is going for).

“We see the delay to tapering as something that supports the yield trade in the short term, but doesn’t change our medium-term view. We remain underweight utilities, REITs and banks."

For what it’s worth, The Squid had been in favour of cyclical stocks since this time last year at the expensive of defensives and yield-y types. Goldies had been a bit sceptical that global yield compression could keep extending Australian outperformance. But, erm, I guess it’s a case of market staying irrational longer than you can stay solvent or something like that.

The National Australia Bank survey for October, released on Tuesday, was pretty disappointing. Investors had been hoping the post-election bounce would continue. But it did not.

Business conditions were unchanged in October at a reading of minus four, while business confidence may have been the biggest disappointment, falling to five from 12 in September. Troublesome, too, given even the RBA had been hoping things might improve after the election.

Now, forgive me for dredging up some old stuff, but at least I’m not stealing from Le Monde. About the time of the federal election this year, Goldies analysed the seven elections and found there was little evidence to show economic indicators meaningfully improved in the months after polls closed. Their findings were that business confidence (from the NAB surveys) has fallen six months before, with the sharpest declines coming three months beforehand. A month before the election, though, confidence tends to rise sharply, holds that level for the three months after the election, and then starts to trail off from there.

Business conditions (NAB surveys) have historically seen momentum slow in the five months leading up to an election, a sharp rise one month out, and then a steady rise three months after the election.